ECJ Cracks Down on Price Squeezing

The European Union has faced a strange task during the past two decades. In the wake of the mandate to liberalize the continent's telecommunications industry, there has been the need to enforce regionwide antitrust regulations even when they sometimes conflict with national regulatory policies.

During the past several years, one such antitrust case against Deutsche Telekom (DT), a major German telecommunications provider, has made its way through the European justice system. In that case, the European Commission fined the company EUR12.6 million for price squeezing. DT charged very similar prices for both wholesale and retail access to the landlines it controlled. The prices were so close that smaller competitors purchasing infrastructure from DT could not afford to charge competitive retail prices. The violation seemed straightforward, except that Germany's telecom regulator--not DT--set the wholesale prices.

On Oct. 14, 2010, the European Court of Justice handed down its highly anticipated appellate ruling in Deutsche Telekom v. Commission, denying DT's appeal and upholding the fine. The case's resolution should remind companies working in regulated European industries that they must be wary not only of national regulators but of European anti-competition rules as well.

"The single most important thing is that you can't just simply go and comply with regulatory rules in your sector. You always have to take account of the competition rules," says Peter Crowther, a partner at Dewey & LeBoeuf.

Free vs. Forced

Following Deutsche Telekom, counsel should know that when European authorities take antitrust action, penalties may depend on the extent to which national regulations have forced--or merely encouraged--a company to act anti-competitively.

"What is the scope of freedom you have from a business perspective, in terms of pricing, sales, terms and conditions and so on?" says Yves Botteman, a senior associate at Steptoe & Johnson. "Businesses that are regulated are not necessarily opted out as far as antitrust enforcement is concerned."

Simultaneously, the ruling altered the meaning of what constitutes a price squeeze. Previously, the court had to determine that either a dominant company's prices to consumers or its rates to competitors who depend on the company's infrastructure had to be individually restrictive. But the court ruled in Deutsche Telekom that if the difference between the two areas is small enough to squeeze out "equally efficient" competitors, that could be enough to constitute a violation.

"In certain industries, new entrants do not achieve the same economies of scale as the dominant enterprise," says Alexandre Verheyden, a partner at Jones Day. "Can you blame the new entrants for being small?"

Because Germany's Federal Ministry of Post and Telecommunications set the wholesale prices, DT did not have the option to lower them. Instead, the European Commission gave DT a controversial recommendation: Charge retail customers more. This left some experts scratching their heads, because this solution would not appear to help customers.

"The net effect of this judgment is to replace a fairly certain position with an uncertain position," says Crowther. "It's not clear where the consumer benefit is in this case."

The court did not address the possible negative repercussions that artificially raising prices could have on retail customers.

Old Habits

The conflicts at issue in Deutsche Telekom are part of the long and complicated history of Europe's attempts to end national monopolies in industries such as telecommunications, Crowther says.

The commission relied on Article 102 of the Treaty on the Functioning of the European Union, which prohibits unfair prices, to levy its charges against DT. Botteman says these rules complement the EU directives officially ending the monopolies.

"They can be used quite effectively to correct market failures," he says.

The European Commission has taken a successful leadership role in dismantling the remnants of these monopolies, where too often state regulators can fall into old habits, becoming overly buddy-buddy and receiving undue influence from dominant companies.

The commission could have chosen to attack the German regulator for favoring DT in possible violation of European Union law, according to an ECJ press release.

"The commission could have pursued the German regulator for allowing such a high wholesale tariff, which effectively squeezed out competitors," says Mark Powell, a partner at White & Case.

Crowther says many people are probably wondering why the EC didn't. But some experts say fighting DT was an easier battle to win.

Negotiating Tool

In-house counsel can take several lessons from Deutsche Telekom. It is especially relevant for companies working in regulated European industries such as gas, oil and emerging areas such as recycling.

Dominant companies need to self-assess and self-regulate for anti-competitive behavior, because relying on the regulatory environment will only suffice "in the rarest circumstances," Crowther says. And businesses need to remain aware of whether regulators truly mandate potentially anti-competitive actions or whether they have any leeway to change their behavior.

"In any regulated sector, dominant companies can't assume their conduct will escape the application of anti-competition rules, even if it has been blessed by the regulatory authorities," Powell says.

It's a different setup than in the U.S., where the industry's regulatory regime would provide legal protection from antitrust claims, he says.

On the other hand, emerging companies can use Deutsche Telekom as a negotiating tool when trying to break into competition with dominant companies. This case dealt specifically with telephone landlines, but it could also be relevant for third parties seeking access to gas pipelines, transmission networks or other industries with wholesale infrastructure.

"There will be clever companies thinking, 'How can we use this to pry open negotiations on wholesale prices?'" Crowther says.

All in all, the ECJ's new ruling in Deutsche Telekom basically stays true to the Court of First Instance's decision in 2008. The recent, nuanced judgment, Verheyden says, illustrates how much shelter companies can take behind national regulations: Not that much.